The AICPA worked with many of its volunteer members and the FASB staff and in June issued “Technical Question and Answer (TQA) 3200.18, Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program.”
This guidance acknowledges that different entities may view the PPP loan and surrounding circumstances differently, and accordingly, they may need to account for the loan and loan forgiveness differently.
GAAP relies on users to evaluate transactions based on substance rather than form. Are PPP loans really debt? Are they a form of government aid? The answer depends on what businesses intended when they applied, and on how they are each able to spend the funds.
There is not any explicit GAAP guidance from FASB about PPP loans. Whenever there is no explicit GAAP for an item, FASB ASC 105-10-05-2 provides that entities should evaluate the transaction in question and compare it to similar transactions for which there is explicit guidance. U sing the FASB terminology, entities should first “analogize” to other areas of authoritative generally accepted accounting principles before considering other nonauthoritative sources.
In TQA 3200.18, AICPA suggests that the following analogies are appropriate for PPP loans:
PPP Loans for Business Entities
Business entities should initially record the funds they receive as a financial liability and record interest at the PPP Program rate. They have a choice of how to recognize the portion of the loan that is forgiven:
- If they view it as true debt forgiveness, the proceeds from the loan would remain recorded as a note payable liability until the loan is (1) in part or wholly forgiven and (2) the debtor has been “legally released”. Once those two criteria are met, they would reduce the liability and record a gain on debt extinguishment.
- If, instead, they view it as a grant that is expected to be forgiven, there are 3 options:
IAS 20 analogy
The proceeds from the loan would remain recorded as a deferred income liability until it is probable that (1) any conditions attached to the assistance will be met and (2) the assistance will be received. Once those two criteria are met, they would reduce the liability “on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.” The income statement effect can be recorded as either (a) a credit in the income statement, either separately or under a general heading such as “other income,” or (b) a reduction of the related expenses.FASB ASC 958-605 analogy
The proceeds from the loan would remain recorded as a refundable advance liability until any conditions attached to the assistance have been (1) substantially met or (2) explicitly waived. Once one of those two criteria are met, they would reduce the liability and record income.FASB ASC 450-30 analogy
The proceeds from the loan would remain recorded as a liability until the gain is either (1) realized or (2) realizable. Once one of those two criteria are met, they would reduce the liability and record income.
The SEC reviewed these options and has indicated that they would “not object to” either 1 or 2(a) above.
PPP Loans for Nonprofit Entities
Like businesses, nonprofits should also initially record the funds they receive as a financial liability and record interest at the PPP Program rate. They have two choices of how to recognize the portion of the loan that is forgiven:
- If they view it as true debt forgiveness, the proceeds from the loan would remain recorded as a note payable liability until the loan is (1) in part or wholly forgiven and (2) the debtor has been “legally released”. Once those two criteria are met, they would reduce the liability and record a gain on debt extinguishment.
- If, instead, they view it as a grant that is expected to be forgiven, they may apply FASB ASC 958-605. The proceeds from the loan would remain recorded as a refundable advance liability until any conditions attached to the assistance have been (1) substantially met or (2) explicitly waived. Once one of those two criteria are met, they would reduce the liability and record income.
PPP loan recipients should carefully examine their expectations about the funds and apply the guidance that they feel is most appropriate. Since this a an instance where GAAP offers multiple options, disclosure of the chosen guidance is critical to providing clarity.
This article contributed by Donna Buzby, CPA, RMA, CGMA
